In the recent case of Smith v Pimlico plumbers Ltd, the Court of Appeal has held that a worker (who was misclassified as self-employed) is entitled to payment for all unpaid holiday that he took during the whole of his working time (five years) on the termination of his employment. This decision has serious implications for employers in the gig economy and other employers who use self-employed contractors, where in reality they are workers with the right to paid holiday.
Mr Smith worked for Pimlico Plumbers from 2005 until 2011 as a self-employed plumbing and heating engineer. Throughout his work with Pimlico Plumbers, he took holiday at Christmas, in summer and on bank holidays. However as Pimlico Plumbers were treating him as self-employed, they did not pay him for his holidays.
Mr Smith, on the termination of his work with Pimlico Plumbers, brought a claim in the employment tribunal for unpaid holiday pay covering the whole period of his work. Pimlico Plumbers disputed that Mr Smith was a worker and argued that he was therefore not entitled to paid annual leave. This point went all the way to the Supreme Court, who held that Mr Smith was a worker and therefore was entitled to 5.6 weeks of paid annual leave per year. The holiday claim case therefore returned to the tribunal.
In 2017 we reported (see article here) on a European Court of Justice (ECJ) case called King v Sash Windows Workshop. That case was about a self-employed contractor (who was in reality a worker), who had taken no holiday during 13 years of work, because his employer did not offer him paid leave. The ECJ held that where an employer has failed to give a worker the right to paid holiday, the worker may carry over and accumulate untaken leave until the end of their engagement, when they can claim a payment in lieu of the entire amount.
The Pimlico Plumbers case is slightly different from the Sash Windows case, as Mr Smith did actually take holiday, but he was not paid for it. In the Sash Windows case Mr King did not take holiday at all.
Both the tribunal and the Employment Appeal Tribunal (EAT) found in favour of Pimlico Plumbers. They held that the principles established in the Sash Windows case were limited to cases of holiday not taken. The Court of Appeal (CA) has now overruled both the tribunal and the EAT and found in favour of Mr Smith.
The CA looked at the underlying European laws that cover the right to paid annual leave. The CA emphasised that the underlying philosophy of paid annual leave is that it is necessary for the health and safety of workers. The CA said that this was a particularly important principle from which there can be no derogation and which should be subject to no preconditions. The CA went on to say that the right to be paid when leave is taken enables the worker to enjoy the necessary rest and relaxation. Failure to pay for holiday is likely to detract from the rest and relaxation and deter the worker from taking it
The CA considered the Sash Windows case and found that it established broad principles that applied to both unpaid leave that had been taken and unpaid leave that has not been taken. The right to paid annual leave is a single composite right. Mr Smith was prevented from taking paid annual leave by reasons beyond his control, in the same way as those who are on long term sick leave are prevented from exercising their right to paid annual leave. This applied throughout his employment and therefore his right to be paid in lieu of this annual leave accumulated and crystallised on termination.
The CA said that employers are required to ensure specifically and transparently that their workers are in a position to take paid annual leave by encouraging and informing them accurately and in good time of their rights. Employers must exercise all due diligence in this.
Series of deductions – broken by a three month gap?
Although the issue of a series of unlawful deductions from wages did not arise in the CA, they still considered the law in this area. You might remember from several years ago the infamous Bear Scotland case in the EAT – see our article here. This case focused on an unlawful deduction from wages claim for underpaid holiday pay. The EAT controversially held that a gap of more than three months between non-payments or underpayments of wages breaks the "series" of deductions for the purpose of bringing an unlawful deduction from wages claim, thereby limiting the opportunity for claimants to claim backdated holiday pay. The CA in Pimlico Plumbers considered whether the Bear Scotland case is still good law and gave a strong provisional view that it is not correct.
It seems highly likely that any future tribunal case on unlawful deductions will consider this strong provisional view and that this inventive piece of case law will be overruled. However, it should not be forgotten that the government has now legislated to limit the ability of claimants to make historical claims for holiday pay in the Deduction from Wages (Limitation) Regulations 2014. These Regulations mean that employment tribunals can only look back two years from the date of the complaint when considering unlawful deductions from wages.
Neither Bear Scotland, nor the Regulations have an impact on the Pimlico Plumbers case, because Mr Smith succeeded not under an unlawful deductions from wages claim, but under different provisions of the Working Time Regulations for payment of holiday on termination.
This case and the previous Sash Windows case have major implications for employers in the gig economy and for other employers who have misclassified staff as self-employed rather than as workers. Where such employers do not provide the right to paid holiday, they are at serious risk of claims on termination for holiday pay going back to the commencement of service. This case could lead to many more claims from gig economy workers based on their employment status given the potentially lucrative claims for unpaid holiday.
It seems likely that this case has no effect on employees who have taken holiday, and been paid for it, but are claiming an underpayment - for example, a failure to include overtime in holiday pay calculations. It seems likely that claims of this sort will be unaffected by this decision because the employees have taken holiday and it has been paid and therefore they have not been prevented from exercising their right to paid annual leave.